Jeremy Grantham of GMO oversaw $54 billion in his fund and decided in 1998-1999 too get out of stock portfolio. Stocks for the long run had stopped looking attractive. Grantham discovered 28 bubbles with 2 or more standard deviations from the mean in the last 130 years and noted that in every bubble the market returned to their mean of 14.6 Prices/Earning ratio for the market as a whole when the P/E was above 23.

John Mauldin believes the market will return to single digit P/E ratios. Mauldin claims the market is 50 percent overvalued using four measurements based on dividend yield: first, the Tobin Q factor is the markets value of a firms assets divided by their replacement value is high by 31 percent; second, the price of stocks to their 10 year average of real earnings is too high by 31 percent; third, market capitalization (stock price x outstanding shares) compared to Gross Domestic Product (GDP) is high by 45 percent; and fourth, the market P/E value of 26 is high from the 15 P/E median and Mauldin and Grantham concede too raising the median to 17.5 P/E factoring that investors are smarter and more liquid. Mauldin concludes the market is overvalued at 50 percent and in recession, the DOW would correct to 6,000. Why the correction? The market loves comfort, stable growth, stable low inflation, and strong profit margins. Biotech and technology receive no exception and as investors move from future value expectations to present value expectations and evaluate companies on value. Some of the old companies will start to look good.

The only force capable of breaking the business cycle is innovation. Innovation charges growth and starts a bull trend.

Operating earnings for 1988 through 2002 was 52 percent, so, in 1988, $100 would cost $152 in 2002, if earnings kept up with inflation and the growth of $23.75 (1988) would have moved to $36.10 in 2003. 15 years of earning grow was 56 percent or 3 percent a year and barely keeping up with inflation meaning 96 percent of the earnings growth was due to inflation and earnings were no where near inflation plus GDP.

What is the 20-year horizon? Mauldin observed that every period of 9.6 percent market returns started with low P/E ratios. The P/E ratio amount strongly correlated with the trend in Market P/E ratio and none of the strong gains occurred without rising P/E ratios. Looking at the market trend, half of the investors realized compound returns less than 4 percent and 10 percent generated gains more than 10 percent. Subtracting inflation, taxes, and dividends the historical growth in earnings has been 2 percent. Only new companies have been able to produce 3 percent. Pensions need 7 percent in real growth. Is it possible some pensions are 1/7 their value? It is impossible to get a 9 percent growth assumption in a 5 percent bond market. Companies often make a 70/30 balance of stock to bonds. The cost for companies to drop their expected rate of return from 9.2 percent to 6.5 would be $30 billion according to CSFB assuming no recession that would correct the DOW to 6,000. Corporations are in a bind and they have assumed the stock market would grow faster than it realistically could. Pension fund replacement of 90 percent allows companies 30 years for the 10 percent in make extra payment; however, a replacement of greater than 10 percent may require the company to make extra payments within 3 to 5 years to bring the fund to 100 percent. Only 4 firms a year grow at 50 percent for 10 years and 18 percent make 10% for 10 years. The S&P earnings can't grow faster than the GDP. The S&P changed it accounting report to core earnings. The large infusion of capital into pensions will reduce reported earnings. As earnings drop so will price. Pensions are required to remain funded by law and as more retiree draw on the pension pressure will increase to replace the depleted funds. If companies are assuming a stock growth of 9.6 percent then larger portions of their earnings will be required punching out the steam on their growth and market capitalization. Companies can only hope that interest rates will remain low, the dollar will increase in strength, and taxation low. The dollar devalues as debt increases, foreign countries like Japan and China buy U.S Treasuries to hold up the value of dollar to keep their exports strong, the dropping dollar makes America products cheap. In a recession bond yields increase, taxes increase, the dollar devalues, deflation increases buying power, and stock price drop.